Exploring opportunities in the generative

AI value chain
April 26, 2023 | Article

Generative AI is giving rise to an entire ecosystem,

from hardware providers to application builders, that
will help bring its potential for business to fruition.

O
ver the course of 2022 and early 2023, tech innovators
unleashed generative AI en masse , dazzling business leaders,
investors, and society at large with the technology’s ability to create
entirely new and seemingly human-made text and images.

The response was unprecedented.

In just five days, one million users flocked to ChatGPT, OpenAI’s

generative AI language model that creates original content in
response to user prompts. It took Apple more than two months to
reach the same level of adoption for its iPhone. Facebook had to wait
ten months and Netflix more than three years to build the same user
base.

And ChatGPT isn’t alone in the generative AI industry. Stability AI’s

Stable Diffusion, which can generate images based on text
descriptions, garnered more than 30,000 stars on GitHub within 90
days of its release—eight times faster than any previous package.[ 1 ]
This flurry of excitement isn’t just organizations kicking the tires.
Generative AI use cases are already taking flight across industries .
Financial services giant Morgan Stanley is testing the technology to
help its financial advisers better leverage insights from the firm’s
more than 100,000 research reports.[ 2 ] The government of Iceland
has partnered with OpenAI in its efforts to preserve the endangered
Icelandic language.[ 3 ] Salesforce has integrated the technology into
its popular customer-relationship-management (CRM) platform.[ 4 ]

The breakneck pace at which generative AI technology is evolving

and new use cases are coming to market has left investors and
business leaders scrambling to understand the generative AI
ecosystem. While deep dives into CEO strategy and the potential
economic value that the technology could create globally across
industries are forthcoming, here we share a look at the generative AI
value chain composition. Our aim is to provide a foundational
understanding that can serve as a starting point for assessing
investment opportunities in this fast-paced space. Our assessments
are based on primary and secondary research, including more than
30 interviews with business founders, CEOs, chief scientists, and
business leaders working to commercialize the technology; hundreds
of market reports and articles; and proprietary McKinsey research
data.

A brief explanation of generative AI

To understand the generative AI value chain, it’s helpful to have a

basic knowledge of what generative AI is [ 5 ] and how its capabilities
differ from the “traditional” AI technologies that companies use to, for
example, predict client churn, forecast product demand, and make
next-best-product recommendations.

A key difference is its ability to create new content. This content can
be delivered in multiple modalities, including text (such as articles or
answers to questions), images that look like photos or paintings,
videos, and 3-D representations (such as scenes and landscapes for
video games).

Even in these early days of the technology’s development, generative

AI outputs have been jaw-droppingly impressive, winning digital-art
awards and scoring among or close to the top 10 percent of test
takers in numerous tests, including the US bar exam for lawyers and
the math, reading, and writing portions of the SATs, a college
entrance exam used in the United States.[ 6 ]

Most generative AI models produce content in one format, but

multimodal models that can, for example, create a slide or web page
with both text and graphics based on a user prompt are also
emerging.

All of this is made possible by training neural networks ( a type of

deep learning algorithm ) on enormous volumes of data and applying
“attention mechanisms,” a technique that helps AI models understand
what to focus on. With these mechanisms, a generative AI system can
identify word patterns, relationships, and the context of a user’s
prompt (for instance, understanding that “blue” in the sentence “The
cat sat on the mat, which was blue” represents the color of the mat
and not of the cat). Traditional AI also might use neural networks and
attention mechanisms, but these models aren’t designed to create
new content. They can only describe, predict, or prescribe something
based on existing content.

The value chain: Six links, but one

outshines them all

As the development and deployment of generative AI systems gets

under way, a new value chain is emerging to support the training and
use of this powerful technology. At a glance, one might think it’s quite
similar to a traditional AI value chain. After all, of the six top-level
categories—computer hardware, cloud platforms, foundation models,
model hubs and machine learning operations (MLOps) , applications,
and services—only foundation models are a new addition (Exhibit 1).

Exhibit 1

However, a deeper look reveals some significant differences in

market opportunities. To begin with, the underpinnings of generative
AI systems are appreciably more complex than most traditional AI
systems. Accordingly, the time, cost, and expertise associated with
delivering them give rise to significant headwinds for new entrants
and small companies across much of the value chain. While pockets
of value exist throughout, our research suggests that many areas will
continue to be dominated by tech giants and incumbents for the
foreseeable future.

The generative AI application market is the section of the value chain

expected to expand most rapidly and offer significant value-creation
opportunities to both incumbent tech companies and new market
entrants. Companies that use specialized or proprietary data to fine-
tune applications can achieve a significant competitive advantage
over those that don’t.

Computer hardware

Generative AI systems need knowledge—and lots of it—to create

content. OpenAI’s GPT-3, the generative AI model underpinning
ChatGPT, for example, was trained on about 45 terabytes of text data
(akin to nearly one million feet of bookshelf space ).[ 7 ]

It’s not something traditional computer hardware can handle. These

types of workloads require large clusters of graphic processing units
(GPUs) or tensor processing units (TPUs) with specialized
“accelerator” chips capable of processing all that data across billions
of parameters in parallel.

Once training of this foundational generative AI model is completed,

businesses may also use such clusters to customize the models (a
process called “tuning”) and run these power-hungry models within
their applications. However, compared with the initial training, these
latter steps require much less computational power.

While there are a few smaller players in the mix, the design and
production of these specialized AI processors is concentrated.
NVIDIA and Google dominate the chip design market, and one player,
Taiwan Semiconductor Manufacturing Company Limited (TSMC),
produces almost all of the accelerator chips. New market entrants
face high start-up costs for research and development. Traditional
hardware designers must develop the specialized skills, knowledge,
and computational capabilities necessary to serve the generative AI
market.

Cloud platforms

GPUs and TPUs are expensive and scarce, making it difficult and not
cost-effective for most businesses to acquire and maintain this vital
hardware platform on-premises. As a result, much of the work to
build, tune, and run large AI models occurs in the cloud . This enables
companies to easily access computational power and manage their
spend as needed.

Unsurprisingly, the major cloud providers have the most

comprehensive platforms for running generative AI workloads and
preferential access to the hardware and chips. Specialized cloud
challengers could gain market share, but not in the near future and
not without support from a large enterprise seeking to reduce its
dependence on hyperscalers.

Foundation models

At the heart of generative AI are foundation models. These large deep

learning models are pretrained to create a particular type of content
and can be adapted to support a wide range of tasks. A foundation
model is like a Swiss Army knife—it can be used for multiple
purposes. Once the foundation model is developed, anyone can build
an application on top of it to leverage its content-creation
capabilities. Consider OpenAI’s GPT-3 and GPT-4, foundation models
that can produce human-quality text. They power dozens of
applications, from the much-talked-about chatbot ChatGPT to
software-as-a-service (SaaS) content generators Jasper and Copy.ai.

Foundation models are trained on massive data sets. This may

include public data scraped from Wikipedia, government sites, social
media, and books, as well as private data from large databases.
OpenAI, for example, partnered with Shutterstock to train its image
model on Shutterstock’s proprietary images.[ 8 ]

Developing foundation models requires deep expertise in several

areas. These include preparing the data, selecting the model
architecture that can create the targeted output, training the model,
and then tuning the model to improve output (which entails labeling
the quality of the model’s output and feeding it back into the model
so it can learn).

Today, training foundation models in particular comes at a steep

price, given the repetitive nature of the process and the substantial
computational resources required to support it. In the beginning of
the training process, the model typically produces random results. To
improve its next output so it is more in line with what is expected, the
training algorithm adjusts the weights of the underlying neural
network. It may need to do this millions of times to get to the desired
level of accuracy. Currently, such training efforts can cost millions of
dollars and take months. Training OpenAI’s GPT-3, for example, is
estimated to cost $4 million to $12 million.[ 9 ] As a result, the market
is currently dominated by a few tech giants and start-ups backed by
significant investment (Exhibit 2). However, there is work in progress
toward making smaller models that can deliver effective results for
some tasks and training that is more efficient, which could eventually
open the market to more entrants. We already see that some start-
ups have achieved certain success in developing their own models—
Cohere, Anthropic, and AI21, among others, build and train their own
large language models (LLMs). Additionally, there is a scenario where
most big companies would want to have LLMs working in their
environments—such as for a higher level of data security and privacy,
among other reasons—and some players (such as Cohere) already
offer this kind of service around LLMs.

Exhibit 2

It’s important to note that many questions have yet to be answered

regarding ownership and rights over the data used in the
development of this nascent technology—as well as over the outputs
produced—which may influence how the technology evolves (see
sidebar, “Some of the key issues shaping generative AI’s future”).

Model hubs and MLOps

To build applications on top of foundation models, businesses need

two things. The first is a place to store and access the foundation
model. Second, they may need specialized MLOps tooling,
technologies, and practices for adapting a foundation model and
deploying it within their end-user applications. This includes, for
example, capabilities to incorporate and label additional training data
or build the APIs that allow applications to interact with it.

Model hubs provide these services. For closed-source models in

which the source code is not made available to the public, the
developer of the foundation model typically serves as a model hub. It
will offer access to the model via an API through a licensing
agreement. Sometimes the provider will also deliver MLOps
capabilities so the model can be tuned and deployed in different
applications.

For open-source models, which provide code that anyone can freely
use and modify, independent model hubs are emerging to offer a
spectrum of services. Some may act only as model aggregators,
providing AI teams with access to different foundation models,
including those customized by other developers. AI teams can then
download the models to their servers and fine-tune and deploy them
within their application. Others, such as Hugging Face and Amazon
Web Services, may provide access to models and end-to-end MLOps
capabilities, including the expertise to tune the foundation model with
proprietary data and deploy it within their applications. This latter
model fills a growing gap for companies eager to leverage generative
AI technology but lacking the in-house talent and infrastructure to do
so.

Applications

While one foundation model is capable of performing a wide variety

of tasks, the applications built on top of it are what enable a specific
task to be completed—for example, helping a business’s customers
with service issues or drafting marketing emails (Exhibit 3). These
applications may be developed by a new market entrant seeking to
deliver a novel offering, an existing solution provider working to add
innovative capabilities to its current offerings, or a business looking
to build a competitive advantage in its industry.

Exhibit 3
There are many ways that application providers can create value. At
least in the near term, we see one category of applications offering
the greatest potential for value creation. And we expect applications
developed for certain industries and functions to provide more value
in the early days of generative AI.

Applications built from fine-tuned models

stand out

Broadly, we find that generative AI applications fall into one of two

categories. The first represents instances in which companies use
foundation models largely as is within the applications they build—
with some customizations. These could include creating a tailored
user interface or adding guidance and a search index for documents
that help the models better understand common customer prompts
so they can return a high-quality output.

The second category represents the most attractive part of the value
chain: applications that leverage fine-tuned foundation models—
those that have been fed additional relevant data or had their
parameters adjusted—to deliver outputs for a particular use case.
While training foundation models requires massive amounts of data,
is extremely expensive, and can take months, fine-tuning foundation
models requires less data, costs less, and can be completed in days,
putting it within reach of many companies.

Application builders may amass this data from in-depth knowledge of

an industry or customer needs. For example, consider Harvey, the
generative AI application created to answer legal questions. Harvey’s
developers fed legal data sets into OpenAI’s GPT-3 and tested
different prompts to enable the tuned model to generate legal
documents that were far better than those that the original
foundation model could create.

Organizations could also leverage proprietary data from daily

business operations. A software developer that has tuned a
generative AI chatbot specifically for banks, for instance, might
partner with its customers to incorporate data from call-center chats,
enabling them to continually elevate the customer experience as their
user base grows.

Finally, companies may create proprietary data from feedback loops

driven by an end-user rating system, such as a star rating system or a
thumbs-up, thumbs-down rating system. OpenAI, for instance, uses
the latter approach to continuously train ChatGPT, and OpenAI
reports that this helps to improve the underlying model. As customers
rank the quality of the output they receive, that information is fed
back into the model, giving it more “data” to draw from when creating
a new output—which improves its subsequent response. As the
outputs improve, more customers are drawn to use the application
and provide more feedback, creating a virtuous cycle of improvement
that can result in a significant competitive advantage.

In all cases, application developers will need to keep an eye on

generative AI advances. The technology is moving at a rapid pace,
and tech giants continue to roll out new versions of foundation
models with even greater capabilities. OpenAI, for instance, reports
that its recently introduced GPT-4 offers “broader general knowledge
and problem-solving abilities” for greater accuracy. Developers must
be prepared to assess the costs and benefits of leveraging these
advances within their application.

Pinpointing the first wave of application

impact by function and industry

While generative AI will likely affect most business functions over the
longer term, our research suggests that information technology,
marketing and sales, customer service, and product development are
most ripe for the first wave of applications.
 Information technology. Generative AI can help teams write code
and documentation. Already, automated coders on the market have
improved developer productivity by more than 50 percent, helping
to accelerate software development.[ 10 ]

Marketing and sales. Teams can use generative AI applications to

create content for customer outreach. Within two years, 30 percent
of all outbound marketing messages are expected to be developed
with the assistance of generative AI systems.[ 11 ]

Customer service. Natural-sounding, personalized chatbots and

virtual assistants can handle customer inquiries, recommend swift
resolution, and guide customers to the information they need.
Companies such as Salesforce, Dialpad, and Ada have already
announced offerings in this area.

Product development. Companies can use generative AI to rapidly

prototype product designs. Life sciences companies, for instance,
have already started to explore the use of generative AI to help
generate sequences of amino acids and DNA nucleotides to
shorten the drug design phase from months to weeks.[ 12 ]

In the near term, some industries can leverage these applications to

greater effect than others. The media and entertainment industry can
become more efficient by using generative AI to produce unique
content (for example, localizing movies without the need for hours of
human translation) and rapidly develop ideas for new content and
visual effects for video games, music, movie story lines, and news
articles. Banking, consumer, telecommunications, life sciences, and
technology companies are expected to experience outsize
operational efficiencies given their considerable investments in IT,
customer service, marketing and sales, and product development.

Services
As with AI in general, dedicated generative AI services will certainly
emerge to help companies fill capability gaps as they race to build
out their experience and navigate the business opportunities and
technical complexities. Existing AI service providers are expected to
evolve their capabilities to serve the generative AI market. Niche
players may also enter the market with specialized knowledge for
applying generative AI within a specific function (such as how to
apply generative AI to customer service workflows), industry (for
instance, guiding pharmaceutical companies on the use of generative
AI for drug discovery), or capability (such as how to build effective
feedback loops in different contexts).

While generative AI technology and its supporting ecosystem are still

evolving, it is already quite clear that applications offer the most
significant value-creation opportunities. Those who can harness
niche—or, even better, proprietary—data in fine-tuning foundation
models for their applications can expect to achieve the greatest
differentiation and competitive advantage. The race has already
begun, as evidenced by the steady stream of announcements from
software providers—both existing and new market entrants—bringing
new solutions to market. In the weeks and months ahead, we will
further illuminate value-creation prospects in particular industries
and functions as well as the impact generative AI could have on the
global economy and the future of work.

1. Guido Appenzeller, Matt Bornstein, Martin Casado, and Yoko Li, “Art isn’t dead; it’s just
machine generated,” Andreessen Horowitz, November 16, 2022.
2. Hugh Son, “Morgan Stanley is testing an OpenAI-powered chatbot for its 16,000
financial advisors,” CNBC, March 14, 2023.
3. “Government of Iceland: How Iceland is using GPT-4 to preserve its language,” OpenAI,
March 14, 2023.
4. “Salesforce announces Einstein GPT, the world’s first generative AI for CRM,”
Salesforce, March 7, 2023.
5. “What is generative AI?” McKinsey, January 19, 2023.
 6. “GPT-4,” OpenAI, March 14, 2023.
7. “What is generative AI?” January 19, 2023; and Kindra Cooper, “OpenAI GPT-3:
Everything you need to know,” Springboard, November 1, 2021.
8. “Shutterstock partners with OpenAI and leads the way to bring AI-generated content to
all,” Shutterstock, October 25, 2022.
9. Kif Leswing and Jonathan Vanian, “ChatGPT and generative AI are booming, but the
costs can be extraordinary,” CNBC, March 13, 2023; and Toby McClean, “Machines are
learning from each other, but it’s a good thing,” Forbes, February 3, 2021.
10. GitHub Product Blog, “Research: Quantifying GitHub Copilot’s impact on developer
productivity and happiness,” blog entry by Eirini Kalliamvakou, September 7, 2022.
11. Jackie Wiles, “Beyond ChatGPT: The future of generative AI for enterprises,” Gartner,
January 26, 2023.
12. NVIDIA Developer Technical Blog, “Build generative AI pipelines for drug discovery with
NVIDIA BioNeMo Service,” blog entry by Vanessa Braunstein, March 21, 2023; and Alex
Ouyang and Abdul Latif Jameel, “Speeding up drug discovery with diffusion generative
models,” MIT News, March 31, 2023.

ABOUT THE AUTHOR(S)

Tobias Härlin and Gardar Björnsson Rova are partners in McKinsey’s

Stockholm office, where Oleg Sokolov is an associate partner; Alex
Singla is a senior partner in the Chicago office; and Alex
Sukharevsky is a senior partner in the London office.

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